Internal Controls

Basic Policies on the Development of Internal Control Systems

(1) Systems for ensuring compliance of director and employee business operations with laws and statutes

i. We shall stipulate the obligations of directors and employees to comply with laws and statutes when conducting business operations in accordance with the HORIBA Corporate Philosophy and our Code of Ethics to create a corporate culture that facilitates legal compliance, and to prevent violations of laws and statutes.

Directors and employees who discover violations of laws and statutes committed by other directors and employees shall report such violations in accordance with the Compliance Management Provisions, and the Compliance Chief Management Officer shall verify reported violations and take appropriate measures to maintain and enhance the governance system, including reporting the violations to relevant company organizations as necessary.

ii. We shall ensure all directors and employees thoroughly understand our Code of Ethics and Compliance Management Provisions, which form the basis of our compliance system, in order to promote the development, maintenance and improvement of our internal control system. We shall also provide training for directors and employees as necessary.

iii. A division established independently of the executive divisions shall conduct internal audits in order to detect and prevent violations of laws and statutes, and to issue instructions for improving business operation processes.

iv. In addition to the company system outlined in i. above regarding the reporting of facts relating to compliance, including violations of laws and statutes, we have already created a reporting system that allows employees to report directly to external lawyers and other groups based on our Compliance Management Provisions. We shall continue to ensure that this system is properly maintained.

v. Auditors shall be required to state their opinions on issues related to the implementation of company systems for legal compliance and compliance with laws and statutes, and shall be required to formulate measures to make necessary improvements.

vi. In order to improve the system for supervision and monitoring by directors and auditors, we have appointed external board members and external auditors with the knowledge and experience required for the proper management of business operations. We shall continue the practice of appointing appropriate external members.

[2] Systems for the preservation and management of information concerning the execution of duties by directors

Information concerning the execution of duties by directors, including information related to the execution of duties by employees who conduct business operations under the direction and supervision of directors, shall be preserved and managed properly and securely in accordance with rules pertaining to documents, such as our Document Management Provisions and Document Preservation Standards, in such a way as to allow access to the information when necessary.

[3] Rules and other systems on the management of risk of loss

We shall establish risk management rules for the development and operation of a risk management system to manage risk of loss. We shall also provide directors and employees with education and training in risk management as required.

[4] Systems for ensuring the efficient execution of duties by directors

In order to ensure the efficient execution of duties by directors, the Board of Directors shall, as a general rule, meet once a month, with special meetings of the Board to be held as necessary. Directors and executive officers shall take appropriate measures, including delegating responsibilities among themselves, to ensure the efficient execution of duties in accordance with decisions made by the Board of Directors.

[5] Systems for ensuring good management practice within the corporate group (HORIBA and its subsidiaries)

i. Group companies shall set out rules based on HORIBA Corporate Philosophy, which is designed to ensure proper management of business operations in all HORIBA group companies. As the system for reporting to HORIBA matters related to the performance of duties by the directors, etc., of subsidiaries, the Group companies shall manage the business operations of subsidiaries, via reporting and approval systems, in accordance with the management rules of related companies and seek reports on matters related to the performance of duties by the directors of subsidiaries, etc., through the management meetings, etc., of each Group company. At the same time, the Group companies shall conduct monitoring and auditing of the subsidiaries, as need arises. As a system for assuring that the performance of duties by the directors, etc., and the employees of subsidiaries complies with laws and statutes, directors and employees who identify serious compliance issues such as violations of laws and statutes by group companies shall report this information in accordance with our Compliance Management Provisions.

ii. As a system for managing risks of loss at subsidiaries, the Group companies shall engage in risk assessment of the subsidiaries in accordance with the management rules of related companies. Regarding domestic subsidiaries, rules related to risk management shall be established for such companies, to establish and implement a risk management system at such companies.

iii. As a system for assuring efficient performance of duties by the directors, etc., of subsidiaries, business management will be promoted on a group-wide scale by organizing management meetings at each Group company, meetings for deliberation and decision-making with regard to global management strategies and meetings for deliberation and decision-making on budgets based on management strategies. Furthermore, business efficiency will be promoted by organizing shared services for business operations among Group companies.

iv. Subsidiaries that identify compliance issues such as violations of laws and regulations in relation to the business management and instructions of HORIBA shall report this information to the division responsible for either auditing or compliance. This division shall immediately report the issue to the auditors and to the relevant internal officers as appropriate. Auditors shall be required to state their opinions and formulate measures to make any necessary improvements. The relevant division and internal officers that have received such a report shall take appropriate measures in accordance with the Compliance Management Provisions, risk management rules and other relevant regulations.

[6] Employees who have been requested to assist auditors to perform their duties and the independence of such employees from the directors and matters related to assuring the effective execution of auditor instructions by such employees

Auditors shall be allowed to request the appointment of audit assistants, chosen from among company employees, to assist them in the performance of their auditing duties. Auditor consent shall be required for all appointments, dismissals, transfers, performance evaluations and wage variations of audit assistants. Additionally, the auditors shall direct efforts to strengthen the auditor assistant organization from the standpoint of audit efficacy and shall work on defining the authorities of auditors and of the organization to which audit assistants belong regarding instructions or orders issued to such assistants.

[7] Systems for enabling directors and employees to report to auditors, systems for receiving reports from persons required to perform business duties, such as directors, auditors and employees performing business duties at subsidiaries, from persons and employees equivalent to such aforementioned persons or persons receiving reports from such aforementioned persons, and systems regarding other matters related to reporting to auditors

i. The directors and employees shall report to the auditors important matters that affect the business operations or business performance of HORIBA. Similarly, directors, auditors, employees, etc., of subsidiaries (including persons receiving reports from the aforementioned persons) shall report to the auditors of HORIBA important matters that affect the business operations or business performance of such subsidiary through the relevant business division of the said subsidiary or the auditor of the said subsidiary. Regardless of the provisions stated above, the auditor shall be able to request reports from the directors and employees and from the directors, auditors, employees, etc., of subsidiaries, whenever such need arises.

ii. We shall maintain the proper operation of reporting systems based on Compliance Management Provisions for internal reporting in order to ensure that compliance issues such as violations of laws and statutes are properly reported to auditors.

[8] System assuring that the person submitting the report is not disadvantaged in terms of working conditions on the grounds that such a report was submitted.

Provision regarding the unfair treatment of the reporting person is established in the Compliance Management Provisions, preventing unfair treatment of the person submitting a report described in [7] above, for having submitted such a report.

[9] Matters related to the policy on the procedures for advance payment or reimbursement of expenses incurred by the auditors during the execution of their duties and on the handling of other expenses and reimbursements arising from the execution thereof said duties

The auditors shall appropriate the budget for expenses recognized as necessary in the execution of their duties, with due attention to efficiency and appropriateness in expenditure of audit expenses. Regarding the expenses incurred in case of a contingency or on a temporary basis, a reimbursement of such expenses may be requested after such an event.

[10] Systems for ensuring the effective implementation of audits by auditors

Every effort shall be made to ensure coordination between auditors and external experts, including lawyers and certified public accountants, and auditing divisions and other internal organizations.

(2) The state of management of the aforementioned systems at HORIBA

[1] The state of action regarding compliance

The HORIBA Corporate Philosophy, Compliance Management Provisions and our Code of Ethics have been established to strengthen our systems pertaining to legal compliance and to prevent unlawful activities. At the same time, the internal reporting system has been introduced as a measure for the early detection and rectification of illegal activity. Legal counseling by outside attorneys, an internal email reporting system, etc., have been created to boost awareness of legal compliance within HORIBA. Furthermore, a compliance committee has been set up as a body for promoting greater awareness of legal compliance and deliberating related issues, as well as to review, report and issue recommendations for redress in response to internal reports received.

[2] The state of action on the appropriate and efficient performance of business duties

Board of Directors’ meetings are held on a monthly basis, with extraordinary Board meetings held as needed, for swift and organized decision-making by the directors. In order to boost speed in business management decision-making and strengthening the supervisory function of the Board of Directors, the Corporate Officer (Executive Officer) organization has been formed. The directors relegate business operations to the corporate officers, who in turn engage in exercising leadership, issuing specific commands and orders and supervising heads of business divisions and other managerial employees. The meeting of the full-time directors, attended by the full-time directors, full-time auditors and corporate officers is held on a monthly basis for reports by each participant on the state of progress in the respective business operation, sharing of management information and assessment and discussion of issues and problems. Furthermore, operation meetings and management meetings attended by the directors, corporate officers and heads of business divisions are held at the rate of two to four times a month each, for report, review, decision-making, etc., related to business operations. In order to improve the system for supervision and monitoring by Board of Directors and auditors, external board members and external auditors with the knowledge and experience required for the proper management of business operations have been appointed.

[3] The state of action regarding the management of risks of loss

Group Risk Management Provisions have been established to strengthen our risk management system, defining the system of responsibilities in risk management in the event of a risk, by classifying risks broadly into risks related to business, risks related to development and manufacturing, risks related to sales and risks related to financial affairs. As the system for deliberation of issues pertaining to risk management and the approval of corrective measures, the HORIBA Group Risk Management Committee fulfills the aforementioned functions to foster awareness of the roles of each person in the HORIBA Group, from top management to field personnel responsible for various duties, and of the need to take responsible and appropriate action in the event of a risk, through regular awareness activities and training programs.

[4] The state of action regarding the appropriateness of business operations in the HORIBA Group

The business operations of subsidiaries are managed via reporting and approval systems implemented by HORIBA in accordance with the management rules of related companies and monitored when necessary. Directors and employees who identify serious compliance issues such as violations of laws and statutes by group companies are required to report this information in accordance with our Compliance Management Provisions. Furthermore, meetings attended by directors and managerial employees of Group companies for deliberation and decision-making with regard to global management strategies and meetings on budget deliberation and decision-making based on management strategies are held as well.

[5] The state of action aimed at effective auditing by auditors

Auditors perform audits in compliance with the audit policy, audit plan, etc., established by the board of auditors and attend Board of Directors’ meetings, the meeting of the full-time directors, operation meetings, management meetings for each business division and other important meetings. Furthermore, the auditors conduct interviews of directors and internal audit divisions regarding performance of their duties, inspect important decision-making documents and examine the state of business operation and assets at the head office and other key worksites, in order to monitor for unauthorized actions regarding performance of business duties by directors and actions violating laws and statutes. Every effort is made to ensure coordination between auditors and external experts, including lawyers and certified public accountants, and auditing divisions and other internal organizations.

HORIBA is founded on interrelationships with various stakeholders, such as shareholders, investors, customers, business partners, employees, etc. (all interested parties). HORIBA aspires to become a truly global company as a manufacturer of analytic instruments conducting business operations around the world. The Company believes that it is its mission to contribute to preservation of the global environment, betterment of human health, improved social safety and convenience and advancement in science and technology by means of its products and services with a high level of added value and its analytic technologies in various markets in the industrial sector and believes that, through such contributions, it is able to fulfill its social responsibility as a corporate citizen to all of its stakeholders.

Furthermore, HORIBA places great importance on its invisible assets, made up of the human resources and technological capabilities that are the source of future earnings and therefore secure the continuity of its business operations, as well as its corporate culture that support these resources. Activities are being implemented for the enhancement of HORIBA brand value as the means of development and advancement in this direction. Through this effort, HORIBA is working on improvement in corporate value and building strong relationships of trust with its stakeholders. As a company with stocks listed in capital markets, HORIBA believes that the shareholders who have invested in the company have decided to delegate the management of its business operations to its top management, with their support of and agreement with its corporate philosophy and management policies. In other words, HORIBA believes that action regarding persons holding decision-making authority on its financial and business policies should be founded on the will of the shareholders. Should there be an acquisition of HORIBA shares in a significant volume, we believe that the decision ultimately lies on the shareholders on whether to accept or refuse such a move.

In the Japanese capital market, we are aware of the possibility of mass stock acquisition, without regard to the existence of stakeholders who are the fountainhead of corporate value and in the self-centered pursuit of short-term gain. HORIBA believes that the best response to such abuse of the share acquisition process is to fulfill its social responsibilities and pursue advancement of its corporate value as mentioned above and therefore believes it is not necessary to introduce measures aimed at protection against buyouts.

In the event that such a mass share acquisition is proposed, however, HORIBA believes that its important obligation is to conduct a thorough review into the details and the terms of such proposal and to present its findings and its opinion to its shareholders and investors, in order to enable the shareholders and investors to make a decision.

In face of a proposal of share purchasing or buyout, HORIBA will execute, as the essential obligation of the management who are responsible for the duty of care of a good manager, decision-making with the careful attention of the impact on its corporate value and the benefits shared with its shareholders and shall implement the appropriate measures in the interest of the shareholders.

For this purpose, HORIBA will engage external experts for an assessment of the stock purchase or buyout proposal in question and conducting negotiations with the parties offering the proposal. With regard to proposals determined to be detrimental to HORIBA’s corporate value and benefits shared with its shareholders, such parties offering a stock purchase or buyout shall be regarded inappropriate to control the authority of its financial and business policies, and appropriate action will be taken in compliance with the relevant laws.

(4) Decision-making policy on dividend payout, etc.

Regarding the payment of dividends to the owners (shareholders), the Board of Directors’ meeting on February 14, 2013, approved the basic policy of determining dividend payout in a versatile manner, with total reimbursement to the shareholder, combining the dividend amount and HORIBA stock acquisition amount, targeted at 30% of consolidated net profits in FY2013 onward. Under this policy, HORIBA plans reimbursement of profits linked to its consolidated business performance to its owners (shareholders), while making prioritized investments into growth areas through effective use of internal reservations, in order to pursue the advancement of its corporate value through profit growth.